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In a family business, a little structure goes a long way

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Recently, Bethlehem candy maker Just Born, a third-generation family business producing favorites such as Mike and Ike, Hot Tamales, Peeps and Peanut Chews, announced an update to its governance structure by adding several outside members to its board of directors.

It’s another reminder why it’s important for a family business to take the time to develop and update its governance policy.

Because for many family business owners, their businesses are their lives. They are fully and personally invested in its success and they are concerned about changing markets and regulations, talent and growth.

Family business owners also are focused on personal wealth, succession planning and family dynamics. Plus, a major cause of organizational problems for family businesses is when they lack effective governance.

Every family business able to improve governance reaps lasting benefits. Effective governance drives business results and helps maintain family harmony.

A well-defined family business governance plan sets expectations and outlines procedures to help maintain the business, enable ongoing success and support the financial well-being of the family.

Governance includes policies that provide structure to educate and facilitate communication between family members and provides a forum for crucial conversations where the stakes are high, opinions vary and emotions run strong.

UNPREDICTABLE MIX

No matter the size of the family business, the unique – and often volatile – mix of personal family dynamics, business strategy and ownership criteria can create an emotionally charged environment that makes decision-making, not to mention day-to-day management, challenging.

And as the founding generation ages, succession and power issues across an expanding family can create cascading concerns.

Yet given all this evidence of why family businesses should implement governance policies, a staggering 71 percent haven’t done so, according to a survey by PricewaterhouseCoopers.

In family businesses, a little structure can be extremely helpful when discussing sensitive issues – such as ownership shares, rights and responsibilities, the competence of family member managers, family member hiring and compensation policies and agreeing on a strategy that is best for business and the family.

INTERDEPENDENT DYNAMICS

The three-circle model, developed at Harvard Business School in 1982, continues to be the central organizing framework for understanding family business systems. A diagram of the model represents three interdependent and overlapping systems in a family enterprise: family, ownership and business.

For a family business to function effectively over time, each system must understand how to interact with and support the other systems. This combination of interaction, support and decision-making is governance.

If you are in a family business, you need to learn the basics of governance and apply the best practices that exist in family business governance.

But even closely held business leaders can benefit from considering how the problems of a family business and closely held business are often the same. Personalities, passions and power, after all, are at the heart of any business.

VISION AND VALUES

A family governance structure builds a strong family by providing a forum to:

Set the vision for the family and define its philosophy toward the family’s relationship with the business and the business’ support of the family.

Uncover and maintain the values by which the family and related enterprises will operate.

Educate family about rights and responsibilities of ownership, family history and values, and prepare for the future.

Establish and maintain an effective plan for ownership and key family leadership role succession.

Develop a board of directors and provide overall shareholder objectives to the Board.

Celebrate individual and family milestones.

Stay informed and communicate with owners.

Recognize and resolve family conflict to promote harmony.

RIGHT PEOPLE AT THE RIGHT TIME

Effective governance provides two outcomes:

Generates a sense of direction, values to live by or work by, and well-understood and accepted policies that tell organization members how they should behave or what they should do in certain circumstances.

Brings the right people together at the right time to discuss the right (important) things.

No organization is effective for long without doing these things. You should measure the effectiveness of your governance system by these outcomes, not by the boards and councils you can put in place.

Given how difficult it is for most people to confront especially sensitive issues and to plan ahead, some degree of formality often helps people focus on their issues, work toward their goals and resolve their differences.

A few well-composed and well-managed governance structures greatly help your chances of success and harmony in a family business.

Tom Garrity is managing partner of Compass Point Consulting LLC in Hanover Township, Northampton County. He is a certified coach with Gazelles International and a certified exit planning adviser with the Exit Planning Institute. Compass Point provides growth and business transition consulting to small- and medium-sized businesses. He can be reached at 610-336-0514 or tgarrity@compasspt.com.

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